The Sri Lankan government, led by President Anura Kumara Dissanayake, has announced its decision to discontinue the imputed rental income tax proposed by the previous administration. The tax, which aimed to levy charges on owner-occupied properties based on their implicit rental value, has been criticized as a tax on "non-existent income."
Deputy Secretary to the Treasury, R.M.P. Rathnayake, confirmed that new proposals to replace the tax are being prepared and will be presented during the third review of Sri Lanka’s $2.9 billion Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF).
Constitutional and Economic Challenges
The imputed rental income tax was initially suggested following the abandonment of a national property tax plan, which faced constitutional and administrative hurdles. Under the 13th Amendment, property tax revenues are reserved for subnational governments, complicating national-level property tax collection.
While the IMF had recommended the tax as a viable alternative, allowing implementation under the Inland Revenue Act, the current administration opposes it, citing concerns about its practicality and fairness.
Focus on Alternative Revenue Measures
The government has emphasized its commitment to achieving revenue targets set under the EFF without imposing undue burdens on the public. Senior Consultant to the President on Economic Affairs and Finance, Prof. Anil Jayantha Fernando, clarified that the IMF sets revenue goals but allows individual countries to determine their methods.
The administration is now tasked with identifying sustainable revenue solutions that align with constitutional provisions and the country’s economic realities.
Upcoming IMF Review and Discussions
The third review of the EFF programme is expected after the Parliamentary Elections. Meanwhile, Sri Lankan officials are attending the 2024 Annual Meetings of the IMF and World Bank Group in New York, where discussions on the new proposals are anticipated.
A Shift Toward Practical Tax Policies
This decision signifies a shift in Sri Lanka’s approach to taxation, moving away from contentious policies toward alternatives that better reflect the country’s fiscal and legal landscape. The government aims to balance its obligations under the IMF programme with the need for practical and equitable taxation.
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